Dish Network (
) competes with satellite pay-TV service provider DirecTV (
), cable companies like Comcast (
) and Time Warner Cable (
) and telecom operators like AT&T (
) and Verizon (VZ).
In a previous article, we discussed the mounting profit margin
pressure that caused us to lower our price estimate for Dish
Dish Network's Margin Under Pressure from
). In this analysis, we examined the dual threat of alternative
platform adoption and competitor pricing pressure, and also
mentioned the potential for increased marketing spending. Here we
dive deeper into the outlook for marketing spend and its impact on
SG&A costs and Dish Network's stock value.
Dish has resorted to promotional incentives and increased
advertising to drive subscriber gains in the recent past and as a
Selling General & Administrative (SG&A)
expenses have witnessed growth over the past year. SG&A
expenses (as % of gross profits) increased from 47% in 2008 to
almost 51% in 2009.
It is interesting to note that despite several promotional
initiatives, overall subscriber subsidies due to promotions have
been declining. However we believe that this may not continue in
the future given the company's position amidst intensifying
competition. If promotional incentives increase and
SG&A (as % of gross profits)
rises more than our base forecasts, there could be a
potential downside of 15% to our price estimate for Dish Network's
Drag the trend-line in the chart below to see the impact of
various SG&A trends on Dish Network's stock value.
Subsidies From Promotional Initiatives Have Decreased
Dish Network's promotional measures included offering
programming discounts to customers who committed to a 2-year
contract (promoted in 2009), reduced installation costs and the
Free HD for Life
offer for new customers. Such incentives put pressure on SG&A
costs through the corresponding increase in subscriber acquisition
Interestingly for Dish Network, subsidies related to promotional
initiatives have declined. While revenues grew by nearly 1% and
subscribers grew by 3% during 2009, promotional subsidies declined
by almost 5%. This improvement can be attributed to Dish Network's
shift in focus from subscriber acquisition to improving financial
Equipment Related Subsidies are Rising
Dish Network, like its other competitors, has been promoting
advanced services including HD and DVR to trigger ARPU growth. In
order to do so, the company is subsidizing the cost for receiver
systems it sells to its customers, prompting a rise in
equipment-related subsidies. While revenues grew by roughly 7% and
1% in 2008 and 2009 respectively, equipment related subsidies grew
by 35% and 13%.
However as promotional subsidies far outweigh equipment-related
subsidies, Dish Network's overall subsidies have declined.
Increased SG&A Could Pressure Stock Value
With equipment-related subsidies expected to rise, the
decreasing trend in promotional subsidies might also turn around
and follow suit. The pay-TV market has become increasingly
competitive and it is becoming more difficult to add new
subscribers. We currently expect SG&A (as % of gross profits)
to hover around 52% going forward. However there could be a
downside to our price estimate for Dish Network's stock value if
promotional subsidies gradually increase towards historic levels
seen in 2006.
To demonstrate the stock sensitivity of this effect, there could
see almost 15% downside to our price estimate if SG&A (as a %
of gross profits) rises to 55% by the end of our forecast period,
vs. our base case projection of stability 52%.
You can see
the complete $24.87 Trefis price estimate for
Dish Network's stock here.